These 4% and 5% rules of thumb for the past 50 years guided fiduciaries and retirees that live off of savings, or endowment managers who parcel out funds annually to run non-profits such as schools and hospitals.

My argument was admittedly simplistic – basically, that with bond yields as low as they are (2% on 10-year bonds) nobody has a prayer at financial sustainability without going far out on the risk spectrum – essentially all stocks, or all risky assets – just to break even with a 4% or 5% draw. I specifically did not consider forward-looking projections when arguing for the unsustainability of current endowment or retiree practices.

We can’t see the future, I said, so I can’t predict. All I can know is that you’ve got to take a lot of risk if you want to stay sustainable, and that’s not very comfortable for most of us.

I was pleased to see a more sophisticated presentation of this idea, which actually makes a mathematical and credible case for low future return expectations.

Bond returns are calculated as the difference between 10 year US Treasury bond yields and inflation expectations.

All of these are totally reasonable ways of calculating expected future real returns based on a 60/40 stock/bond mix. The picture we get, according to AQR, is that real return on assets may be reasonably projected as the lowest in over 100 years, at somewhere below 3%.

I’m left pretty worried for retirees and endowment managers drawing 4% and 5% from their principal every year.

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